Transparency is critical to both lowering the risk of the financial system, as well as to reducing costs to end-users. The more transparent a marketplace is to the public, the more efficient it is, the more liquid it is, and the more competitive it is.
We have completed the bulk of the congressionally mandated transparency reforms for the swaps market. This fall real-time reporting to the public and to regulators will begin for swaps market transactions.
Second, detailed and up-to-date reporting by large traders in the physical commodity swaps markets began last fall. This reporting allows regulators to better police for fraud, manipulation and other abuses.
Third, the CFTC also plans to begin publishing aggregated swaps market data. The public has benefited for years from the Commitment of Traders futures data we publish. Our goal is to provide similar public transparency for the swaps market.
Fourth, in May, we completed rules, guidance and acceptable practices for designated contract markets (DCMs). DCMs will be able to list and trade swaps, helping to bring the benefit of pre-trade transparency to the swaps marketplace.
Looking forward, we have two important transparency rules to complete related to block sizes and swap execution facilities (SEFs). These critical Dodd-Frank reforms will bring pre-trade transparency to the swaps market for the benefit of all the end-users that use swaps.
For over a century, through good times and bad, central clearing in the futures market has lowered risk to the broader public. Dodd-Frank financial reform brings this effective model to the swaps market. Standard swaps between financial firms will move into central clearing, which will significantly lower the risks of the highly interconnected financial system.
The CFTC has made significant progress on central clearing for the swaps market. We have completed rules establishing new derivatives clearing organization risk management requirements.
Second, to further facilitate broad market access, we completed rules on client clearing documentation, risk management, and so-called “straight-through processing,” or sending transactions immediately to the clearinghouse upon execution.
Third, we completed the rule on the end-user exception to clearing. Consistent with congressional intent, this rule ensures that end-users using swaps to hedge or mitigate commercial risk will not be required to bring swaps into central clearing.
Fourth, the CFTC last week also proposed a rule that would permit certain cooperatives to choose not to clear member-related swaps. Cooperatives act on behalf of and are an extension of their members. Thus, I believe it is appropriate that in certain circumstances, those cooperatives made up entirely of members that could individually qualify for the end-user exception should qualify as end-users.
In addition, the Commission has adopted four important customer protection enhancements: the amendments to rule 1.25, the gross margin rule, the LSOC rule for swaps and rules on the minimum requirements for SROs regarding their financial surveillance of FCMs.
Commissioners now are reviewing staff recommendations on clearing requirement determinations. I expect we will consider the first determinations later this month. The staff recommendations are based upon clearinghouse submissions on swaps they already clear. They begin with standard interest rate swaps in U.S. dollars, Euros, British pounds and Japanese yen, as well as a number of CDS indices, including North American and European corporate names.
Based upon the Dodd-Frank 90-day clock for making such determinations, the first clearing determinations may be completed in October just before the gross margin and LSOC rules go into effect November 8.
Commissioners also are reviewing staff recommendations on the final rule for phased implementation of compliance with the clearing requirement for various groups of financial entities.
The CFTC also has received substantial public input on the clearing of swaps among affiliates of the same financial entity. The staff recommendation, which would exempt certain affiliate swaps from the clearing requirement, is under review by commissioners.